How the jobs report could disrupt the market’s snooze

If report surprises, markets could reprice Fed views

NEW YORK (MarketWatch) — Investors have been content to take a summer slumber as central bankers sing easy-money lullabies. But don’t discount the possibility that a strong jobs report could shake traders awake.

It would take a particularly strong U.S. nonfarm payrolls report on Thursday to alter market expectations about the economy. But should it sharply exceed expectations of 215,000 nonfarm jobs and a steady 6.3% unemployment rate, it could force a rethink toward a Federal Reserve that’s less committed to low-rate policies, investors and strategists say.

Wednesday’s report from Automatic Data Processing Inc. provided one surprise: 281,000 new private-sector jobs last month, and the most since November 2012. The report is often used as an early indicator of the payrolls number. Despite its mixed record in predicting that part of the official monthly jobs report, it’s the latest in a string of improving data points that many say shows an economy gaining steam.

“The risks are on the upside in terms of the number of jobs created” after that ADP report, said Robert Tipp, chief investment strategist at Prudential Fixed Income.

Think about Fed rate expectations like a trip in the family minivan. Federal Reserve Chairwoman Janet Yellen and her policy committee are in the driver’s seat, slowly and steadily cruising toward the first rate hike. The numbers on employment and inflation are quietly cooperating in the back seat. But if data keep improving more rapidly, that will add to the “are we there yet?” clamors, and Yellen eventually may speed up.

If that happens, the S&P 500
SPX, -0.88%
already near record levels, could rise further, Treasury yields
US:10_YEAR
could climb, and the dollar
DXY, +0.44%
could strengthen against its rivals.

For now, Yellen has been keeping the steering wheel steady, shrugging off rising inflation during a quarterly press conference last month and elaborating on her views in a talk at the International Monetary Fund on Wednesday. Unusually, investors in the bond market now expect rates rising more slowly than the Fed’s consensus projections.

“It’s going to take a remarkably strong report on [Thursday] to change that picture. Absent that, I think the only thing that will change that picture is the Fed itself,” said Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock.

Here are some things to look for in the jobs report:

Wages: The rise in employee earnings, as measured by average hourly wages, has come into vogue as a key indicator of labor market health. It is thought to represent the juncture where an improving labor market begins to push the cost of goods higher. Wage growth has been tepid, showing 0.2% growth last month, but if it rises faster, it could change market rate-hike expectations.

Labor-force participation rate: This measure of the share of people with jobs or are looking has been lingering near a 36-year low. Americans have been leaving the labor force even as the economic recovery progresses, but if they reenter, that could signal that rates need to remain low to help those people get back on their feet. If the participation rate keeps falling, that could signal a structural shift toward a smaller workforce that doesn’t require continued accommodation.

Headline payrolls number: The monthly number of jobs created may not be a cohesive indicator on labor market health, but growth in that number is another positive data point that adds to the narrative of an improving economy. Last month marked the fourth consecutive month that payroll growth exceeded 200,000, the first time that’s happened since 1999.

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